Tax Reform – Now What?

The House and Senate have approved a reconciled version of the tax bill, which will be signed into law shortly. Most of the changes become effective for tax years beginning on or after January 1, 2018, but expire after 2025.

Here are the details of the final tax agreement, according to highlights from the conference committee:

· Eliminates penalty under the Affordable Care Act for failing to have health insurance

· Lowers corporate tax rate from 35 percent to 21 percent (higher than the original 20 percent in the House and Senate bills)

· Reduces top effective marginal tax rate for S corporations to a top rate of 29.6 percent, allowing for a 20 percent tax deduction that applies to the first $315,000 of joint income earned by all S-corporations

· Eliminates corporate Alternative Minimum Tax (AMT)

· Does NOT eliminate the individual AMT, but increases the exemption amount from the AMT for individuals so that fewer households will pay the AMT

· Keeps seven individual tax brackets, although those brackets would generally decrease for all individuals, with a maximum rate of 37% (previously 39.6%).

· Continues to exempt the value of tuition waivers from taxes (the GOP had considered counting tuition waivers as income, and thus, taxable.)

· Increases the refundable portion of the child tax credit to $1,400, in response to Sen. Marco Rubio's insistence. The overall child tax credit will increase from $1,000 to $2,000.

· Roughly doubles the standard deduction, from $6,350 to $12,000 for individuals, and from $12,700 to $24,000 for married couples filing jointly

· Preserves the child adoption tax credit

· Allows individuals to write off the cost of state and local taxes, but only up to $10,000. Filers must choose to deduct sales tax, state income tax, or property taxes, instead of being able to deduct all local taxes.

· Preserves the mortgage interest deduction for all homeowners with existing mortgages, and for homeowners with new mortgages, the home mortgage interest deduction will be available up to $750,000

· Preserves the charitable deduction as-is

· Adds a deduction for up to 20% of “qualified business income.” (Also adds a lengthy and complicated definition of qualified business income)

With these changes, there are a few things that you can do in the remaining days of 2017 to permanently reduce your taxes. Here are 3 suggestions:

1. Pre-pay your 2018 property taxes, if possible

Taxpayers who itemize their deductions may want to consider prepaying their 2018 property taxes before Dec. 31. Because the tax bill will cap the deduction for state and local taxes (SALT) at $10,000 starting next year, homeowners can maximize their SALT deductions in 2017 by prepaying next year's property taxes before Dec. 31.

2. Make bigger charitable donations

The GOP tax bill almost doubles the standard deduction to $12,000 for single people and $24,000 for married couples. That means taxpayers whose deductions fall below those caps won't be able to itemize starting in 2018.

Because of that, taxpayers may want to consider contributing more to charity in 2017 while they're more likely to be able to itemize their deductions. The value of those deductions will be greater this year compared with 2018, when many taxpayers will be pushed into a lower tax bracket under the new GOP provisions.

We always recommend accelerating deductions to the extent that you can. It is better to take a deduction now, against a 39.6 percent tax rate, rather than in 2018 with a 37 percent rate.

3. Defer income until 2018

Many taxpayers will find themselves in a lower tax bracket next year under the GOP provisions. For instance, married couples who earn a combined income of $80,000 will be in a 22 percent tax bracket next year, compared with 25 percent under the current law.

That creates an incentive to defer income until next year, when tax rates may be lower. Of course, that's not possible for those Americans who receive a paycheck every two weeks from their employers. But workers who expect year-end bonuses could talk with their employers about delaying payment until 2018. Likewise, contractors can ask clients to delay payment until after January 1, and small business owners can consider pushing their own income payouts into the new year.

Please call our office if you would like clarification on any of these items or further guidance on how to maximize the benefits!

Beginning July 1, 2017, employees are entitled to earned paid sick time and accrue a minimum of one hour to earned paid sick time for every 30 hours worked, subject to the following limitations:

Employees whose employers have less than 15 employees may only accrue or use 24 hours of earned paid sick time per year

Employees whose employers have 15 or more employees may only accrue or use 40 hours of earned paid sick time per year

Employers are permitted to select higher accrual and use limits

Terms of Use

Earned paid sick time may be used for the following purposes: (1) medical care or mental or physical illness, injury, or health condition; or (2) a public health emergency; and (3) absence due to domestic violence, sexual violence, abuse, or stalking. Employees may use earned paid sick time for themselves or for family members.

We would be happy to help you with any questions you have regarding this new law. Please contact our office today!

Is your child a student with a summer job? Here's what you should know about the income your child earns over the summer.

All taxpayers fill out a W-4 when starting a new job. This form is used by employers to determine the amount of tax that will be withheld from your paycheck. Taxpayers with multiple summer jobs will want to make sure all their employers are withholding an adequate amount of taxes to cover their total income tax liability. If you have any questions about whether your child's withholding is correct, please call us.

If your child is working in food service, he or she may receive tips as part of their summer income. All tip income is taxable and is, therefore, subject to federal income tax.

If you own your own business, consider hiring your child and pay them a deductible wage rather than simply giving them nondeductible spending money.

Many students do odd jobs over the summer to make extra cash. If this is your child's situation, keep in mind that earnings received from self-employment are also subject to income tax. This includes income from odd jobs such as babysitting and lawn mowing.

If your child has net earnings of $400 or more from self-employment, he or she also has to pay self-employment tax. This tax pays for benefits under the Social Security and Medicare system. The self-employment tax is figured on Form 1040, Schedule SE.

Subsistence allowances paid to ROTC students participating in advanced training are not taxable. However, active duty pay, such as pay received during summer advanced camp is taxable.

Special rules apply to services performed as a newspaper carrier or distributor. As direct seller, your child may be treated as being self-employed for federal tax purposes if all pay for these services directly relates to sales rather than to the number of hours worked and delivery services are performed under a written contract which states that your child will not be treated as an employee for federal tax purposes. Generally however, newspaper carriers or distributors under age 18 are not subject to self-employment tax.

A summer work schedule is sometimes a patchwork of odd jobs, which makes for confusion come tax time. Contact the office if you have any questions at all about income your child earned this summer season.

All businesses and business owners should know the rules when it comes to classifying a worker as an employee or an independent contractor.

An employer must withhold income taxes and pay Social Security, Medicare taxes and unemployment tax on wages paid to an employee. Employers normally do not have to withhold or pay any taxes on payments to independent contractors.

Here are two key points for small business owners to keep in mind when it comes to classifying workers:

1. Control. The relationship between a worker and a business is important. If the business controls what work is accomplished and directs how it is done, it exerts behavioral control. If the business directs or controls financial and certain relevant aspects of a worker’s job, it exercises financial control. This includes:

The extent of the worker's investment in the facilities or tools used in performing services

The extent to which the worker makes his or her services available to the relevant market

How the business pays the worker, and

The extent to which the worker can realize a profit or incur a loss

2. Relationship. How the employer and worker perceive their relationship is also important for determining worker status. Key topics to think about include:

Written contracts describing the relationship the parties intended to create

Whether the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation or sick pay

The permanency of the relationship, and

The extent to which services performed by the worker are a key aspect of the regular business of the company

The extent to which the worker has unreimbursed business expenses

If you have any doubt as to whether you are correctly classifying your workers, contact AA Tax CPA to make sure you are in compliance.

The Arizona Department of Revenue announced last week that they made a mistake. It mailed incorrect 1099-G statements of refunds to about 580,000 taxpayers in January 2017. The 1099-G forms for 2016 are supposed to show refunds taxpayers received after filing their 2015 tax return. Instead, the department sent out forms showing the 2014 refund amount.

Taxpayers use the forms to fill out their state and federal tax returns. Using the incorrect information could cause a taxpayer's return to be flagged by the IRS.

Any taxpayer who received an incorrect 1099-G from the Arizona Department of Revenue in January should destroy the form. The correct form has the word CORRECTED located in the upper right side of the form in red.

This matter does not impact anyone who did not itemize deductions on the federal return and did not receive an Arizona state income tax refund in 2016 for tax year 2015 or earlier.

Corrected 1099-G forms have been printed and will be mailed out on Monday, February 6th.

The additional cost to reprint and mail the corrected tax forms is estimated at nearly $300,000.